The Market Mind Hypothesis, page 79
33 As an aside, replacing some words offers another example of the similarities between mind and market: “[prices] appear to be the main way in which the [market] adapts to novel, challenging and informative events in the world”.
34 At this stage I will describe this conceptually and for illustrative purposes. I will thus not discuss the mathematics behind these concepts which, in any case, are widely available in the finance literature.
35 A particular form of discounting is so-called hyperbolic discounting. It is a cognitive bias whereby people prefer a smaller immediate reward for larger postponed rewards, with the preference (quantified via a discount factor) growing stronger as the delay in the larger rewards shortens. A related concept is intertemporal bargaining, whereby the current ‘you’ basically bargains with future versions of ‘you’. For example, the current you sacrifices by eating a healthy salad but promises the future you a chocolate cake as a reward tomorrow.
36 Pure securities are part of state preference theory and the theory of complete markets (Flood, 1991). They were introduced by Arrow (1964) and are also known as Arrow-Debreu securities due to the link to Debreu’s concept of a certainty economy. Unlike them I will not use pure securities for equilibrium purposes but rather for their role as the market’s “nervous system, transmitting signals” (Beinhocker, 2007, p. 38) in order to support the theoretical underpinning of the MMH. Also, here value can be in the form of a commodity, money (e.g. currency), or even a service.
37 See Ziegler (2010).
38 See, Panksepp’s earlier quote.
39 Just like in economics, where a bond return is different from an equity return. They signal different information and serve distinct purposes in terms of adapting (i.e. benefiting from/hedging against) (changes in) states of the world.
40 Chalmers may, of course, disagree with this interpretation.
41 For a discussion on the type of information (theory) that is appropriate, see Chaitin (2020).
42 See Bateson (1972). Although most people simply equate information to this “difference”, Bateson starts with an important reference to Kant: “I suggest to you, now, that the word ‘idea’, in its most elementary sense, is synonymous with ‘difference’.” Later he suggests that “idea” is the particular selection of “differences” or facts (i.e. “Das Ding an Sich” in Kant’s terms). That selection is the result of perception, filtered by (the make-up of) the mind~body which determines expectations. Again, for our purposes I prefer the terms return and impression.
43 Apart from Chinese traditions these are also derived from Greek philosophies (Plato and Pythagoras). They form part of the philosophy and psychology of mathematics and I will discuss this more in chapters 6 and 7. See also Schotanus (2013b) for a particular view on prices.
44 Intersubjectivity means that we can also experience it together, i.e. from a second person perspective.
45 Again, with the encapsulated brain as the physical example of that separation.
46 The consensus view is that intentionality, in terms of goal-directed behaviour, is generally only assigned to S2-representations.
47 See Kahneman (2011) and Epstein (1994). Still, this overview and its distinctions should not be taken too strictly. Also, like Epstein, I generally do not separate the cognitive from the psychoanalytical unconscious, certainly not of the Jungian kind (see also Mlodinow, 2012).
48 It differs from the mechanical operations of artificial designs because it is innate and has evolved organically over centuries, involving masses of “experience’ data that are no longer available. See also my later comments on AI.
49 I consequently do not follow Kahneman (2011) who considers S1 to be the “experiencing self” and S2 to be the “remembering self”.
50 For other critiques of dual-system models and for alternative views of S3, see the work by researchers like Olivier Houdé, Keith Stanovich, and Jonathan Evans (Evans, 2018, including the references therein).
51 Which, as we know, can lead to biases.
52 Gnosis is a particular form of knowledge of the heart that I will not go into here, but for those interested see Quispel and Van Oort (2003). For background, the late Professor Gilles Quispel is the first editor of the gnostic scriptures found at Nag Hammadi in Egypt. He also happens to be the father of my former academic advisor at the University of Groningen, Caroline Quispel.
53 Here it includes so-called affective consciousness.
54 What is known as “pure consciousness” is a particular instance with its own phenomenology (e.g. Metzinger, 2020). Some would argue this is a separate (and thus third) type of consciousness. Related topics include meditation, mindfulness and tao, for example. I will not discuss these here.
55 As in irreducible and unprepared. From another angle: not tainted by quantifying.
56 Children believe plants to be conscious (Inagaki and Hatano, 1987).
57 Although there are differences, here it encompasses another interpretation called “Theory-Theory’. For investment interpretations and investigations, see Bruguier, Quartz and Bossaerts (2010) and De Martino et al. (2013).
58 Including “embodied simulation’, involving mirror neurons. See Williams (2018) and the references therein.
59 Available here: https://www.youtube.com/watch?v=n9TWwG4SFWQ.
60 Although some reviewers of the study refer to it as an “illusion”, i.e. you cannot ‘really’ assign mentality to these shapes, they miss the point. The geometric shapes acted as symbolic agents and the pre-recorded movements were intended to invoke a story. In the words of Heider and Simmel: “It is held that this method is useful in investigating the way the behavior of other persons is perceived”.
61 The term idd is a tongue-in-cheek variation of statistics’ iid (independent and identically distributed).
62 Not necessarily the same as a bull market.
63 Popular works on AI include Bostrom (2014), Brynjolfsson and McAfee (2014), O’Reilly (2017), Russell and Norvig (2010), Tegmark (2017), and anything by Jaron Lanier. I refer to these and other AI material for more background.
64 A third variation, called organoid intelligence, is in its early stages. It is a form of hybrid or biocomputing via ‘intelligence-in-a-dish’ whereby brain cells are grown from stem cells and placed in petri dishes. They are then connected to and trained by technology, e.g. using big data. Obviously, there are all kinds of (e.g. ethical) issues with this.
65 Other advanced methods include hyperdimensional computing.
66 Source: Berkeley Breathed/Bloom County.
67 For a critical view on deep-learning, see Markus (2018) for example.
68 Admittedly, although I consulted some literature on the experience of dying, I necessarily speculate here. For a related view regarding life and death of AI, see Vallverdú and Talanov (2016).
69 So, not purely instinctual.
70 Also known as systematic investing.
71 For an early interpretation, see Muth (1961) and Lucas (1972). This is a broad field, including mathematical branches like Dynamic Stochastic General Equilibrium (DSGE) modelling. For a brief overview of uncommon explorations of economic theory, see Kutler (2010).
72 Formally, REH further assumes, for example, that prices are flexible and that markets clear at all times. Other conditions related to rationality, like transitivity and independence, will not be discussed.
73 It also implies more technical properties, for example that expected utility is maximised using unbiased subjective probabilities.
74 For historic overviews of mechanical finance, including the EMH, see Bernstein (1992), MacKenzie (2008), and Rubinstein (2006). For a particularly critical view see Fox (2009).
75 That is, relevant or price-sensitive information.
76 As part of quantitative finance I discussed this earlier in terms of (Arrow-Debrue) pure securities. Their prices reflect ‘states of the world’ in probability terms, e.g. ‘state prices’. State-contingent claims are the contracts, e.g. derivatives, that have a future payoff depending on the state of the world. But see also Ayache (2010a).
77 Usually ignored in financial applications of complete markets (e.g. see Flood, 1991).
78 This is a separate issue from the question whether markets should be involved (directly or indirectly) with solving climate change.
79 Related terms are corporatocracy, crony capitalism and surveillance capitalism.
80 As far as anti-trust goes, lowering prices may benefit customers in the short run but not in the long run if it squeezes out competition and/or choice.
81 I thus disagree with Gul and Pesendorfer (2005), for example. Specifically, the contribution of neuroeconomics should be judged in the wider context of cognitive science. (As an aside, they may have changed their minds after the two reality checks showed that we need to find answers elsewhere).
82 See Nofsinger and Sias (1999).
83 Copied with permission. Only slightly edited for clarity.
84 Many of my arguments, particularly about the benefits of market dynamics, also apply to relatively new market platforms, like those of Airbnb, Uber, and Amazon.
85 I use the terms “financial economy”, “financial system”, or simply “market” to refer to all security markets. Formally only securities with a duration beyond one year are traded on capital markets, whereas those with shorter durations are traded on money markets.
86 Another way of seeing these financial assets is as claims on the real assets in the economy.
87 Paraphrased. The original is attributed to Keynes.
88 For more details of the modern monetary system, money creation and the role of banks, see McLeay et al. (2014-a and 2014-b).
89 Stated in his 1999 letter to shareholders of Berkshire Hathaway, http://www.berkshirehathaway.com/owners.html. Accessed 14/04/2012.
90 Unless stated differently, a security stands for the generic instrument (e.g. Apple stock, as listed on the exchange), not the individual item (e.g. your Apple stock that you just traded). For ease I include currencies. Any trading that does not take place via exchanges is called over-the-counter (OTC).
91 Likewise in biology; see Section A on cognitive science as well as Chapter 1. The point is that competition and cooperation operate at both the individual and collective human level. Also, there are variations to these, e.g. anti-cooperation and ‘tit-for-tat’ are forms of competition.
92 For a view on this broader economic sentiment, particularly consumer sentiment, see Gopaldas (2014).
93 Studied via market microstructure, a specific branch of finance focused on the aspects of exchanges, like the flow architecture that support them. See Lyons (2001) and Knorr Cetina (2003).
94 A related issue is the self, which I will not go into here.
95 As an aside, elsewhere Hayek echoes Kant, Jung, and others when he states that there is a principle that applies “to all conscious and particularly all rational processes, namely the principle that among their determinants there must always be some rules which cannot be stated or even be conscious”.
96 For other philosophical explorations of derivatives see Ayache, 2010a.
97 As Schumpeter explained, “Rationality of thought and rationality of action are two different things” (1943, p. 259, fn. 11).
98 If nothing else it experientially reflects what Einstein already determined, namely that time is relative. Still, while I leave this to physicists (and possibly to biologists) to answer, one could further speculate that physically at least it may have something to do with the ability of active matter (e.g. animated beings) to break the symmetry of time reversal. This ability, for example, separates it from fixed matter in equilibrium.
99 See also Section A4.
100 I must warn that I will switch back and forth between concepts, realms and topics. On occasion this may be challenging to follow.
101 For background, the way economics nowadays thinks about portfolios emerged from Modern Portfolio Theory (MPT) and other theoretical developments, starting in the late 1960s/early 1970s. These developments were shortly followed by practical implementations (e.g. indexing), as well as deregulation which had a significant impact on investment practise and generally resulted in a more prominent role of ‘free’ markets.
102 Here are two examples of assets becoming negative, i.e. turning into liabilities. First, the sore arm of the successful tennis player turns into a debilitating injury. Second, the beliefs developed during an enriching career are painfully questioned during a midlife crisis.
103 Viewed from dual process theory (see Bargh, 1994), S1 and S2 are just another taxonomy for the ‘sectorial’ make-up of the portfolio.
104 Krishnamurti being a prime example.
105 To add to earlier comments, for some readers this ‘dual’ economic system may not be strict enough regarding the distinction between matter and mind. In other words, the fact that the real economy contains mental aspects and, vice versa, the financial economy contains physical elements blurs the view, particularly compared to the individual mind~body. The first defence is that this should be judged in relative terms, e.g. the market is primarily psychological, financial capital is more mental than physical capital, etc. Second, both economies contain human mind~bodies so the blurring is inevitable. Third, portfolioism is a version of dual-aspect theories, not pure Cartesian dualism, and is meant as a practical, applied tool, i.e. intuition pump. I hope (and suspect) most readers will be able to make the necessary distinctions, particularly once the intuition starts flowing.
106 All avoid the homunculus regress.
107 To be clear, immigration, for example, is not true (i.e. beneficial) freedom of movement when it is caused by constraints on other freedoms and/or leads to constraints on existing freedoms.
108 As we’ll see shortly, we continually (subliminally) try to interpret the quantitative language of prices qualitatively (symbolically). Mr Market’s mind~body language means that the way he “speaks” is as important as the numbers “spoken”.
109 Here I’m ignoring the bargaining between multiple selves, implied by hyperbolic discounting (see Ainslie, 2014).
110 To refresh: the phenomenal (S3) realisation of information, complementing the simultaneous physical (S1, S2) realisation (Chalmers, 1996).
111 And then there is, of course, true uncertainty, e.g. a crash.
112 Please ignore the specifics of the equations. They are purely symbolic examples, suggesting layered composites (i.e. “funds”) containing multiple psychurities that interact in complex ways to form a coordinated (e.g. levered) response.
113 This can include, for example, S3 disclosing it’s “into the money” on, thus raising its exposure to, an emotion, e.g. fear.
114 Think of new experiences, e.g. painful discoveries, but also empathy.
115 “Eio Far East fund’s fundamental difference”. Active Trader Interview. Active Trader Magazine, April 2014, Volume 15, No. 4, pp. 44–49.
116 For a related but more detailed view, see Rowlands (2010, Chapter 6).
117 For a detailed discussion, see Wood (2019).
118 Interpretations of intersubjectivity evolved from the philosophies of, among others, Buber, Husserl, Heidegger, Sartre and Habermas. For an overview, see Stahl (2016).
119 There are numerous issues related to this that I will not discuss here. For example, the difference between ownership of an experience in real-time by one ‘self’ and the subsequent ownership of the memory of that experience by the next ‘self’. One instance where this is relevant is a financial crisis when a majority of people have diverse experiences along its path that eventually converge into selling close to the bottom, when the experience of financial pain is highest when it ends (i.e. relieved by selling). That then becomes the uniform memory of the majority.
120 Let alone a non-participating observer.
121 As language is central to narratives, I had expected to find references in the narrative economics literature to analytic philosophy, specifically language philosophy (e.g. to Wittgenstein, or to the “linguistic turn”) but could not find any.
Patrick Schotanus, The Market Mind Hypothesis
